Why Interest (Riba) is prohibited in Islam?

It is worth to present an example to start with the subject, a factual example from existing interest based banking methodology that is valid and current, which can be well understood by a common person. One should consider the following facts before going through the example. The facts are:

Only Banks create money.

The created money is then supplied in to the economy only in the form of loan at some specified interest.

There are no other institutions that create money other than banks.

The example - an astonishing fact

As all the banks are creating money and supplying in to the economy on interest and without any doubt all of them are practicing the same technique, so let us consider there is only one bank in our example that creates some money and supply in to the people's economy.

Suppose Bank XYZ creates Dirhams 100,000 and supplies it at an interest rate of 10% per annum to several entrepreneurs and governmental units active in the economy, remember there is no money available in the economy from any other source. The bank has taken substantial collateral or guarantee as security of its money from each borrower. See in the following diagram - the borrowers intake loan and repayment liabilities at the end of the first year:

It is very simple and clear that at the end of the first year, a combined sum of Dirhams 110,000 is due on all borrowers to repay to the loaning bank.

But the money available in the economy is only Dirhams 100,000 as the bank is only supplier of money, so from where the rest 10,000 would come that is the difference in the borrowers intake and total repayment amount...... from NOWHERE. Yes, that is right from nowhere because that money does not exist in the economy.

Look at the scene, the bank is the only supplier of money, it creates and supplies 100,000 in the economy and that is the total money available in the economy, but as per loan agreements - these borrowers collectively have to pay back 110,000. How is that possible? There is no way. Don't you believe, it is 100% like this - no less. This is cheating and criminal foul play.

So what will happen, at least one or more of these borrowers would default on their loan(s) and would loose their personal assets or belonging that they had put as security to the bank for the repayment.

The money creator has designed a mechanism that would force few of the borrowers each year to default so that bank could forfeit the security assets and gain wealth by foul play.

This is an eye opening example for those who previously had no idea about the mechanism of banks as how they operate and cause artificial shortage (scarcity) of the money in the societies. This is happening every where in this world from USA to the smallest country on this beautiful planet. This artificial scarcity of money is the root cause of people's problems from hard struggle for surviving to the loss of happiness from their lives.

In a Riba (interest) based system, people are not aware of this foul play - borrowers think that they will manage to repay the principal plus Riba (interest) as they think it would be coming from some where else, but the fact is - every borrower would be in battle with others where some borrowers have to lose in order for others to win, some would fail to pay their loans in order for others to get the sum they need to pay off the Riba (Interest). When seen in totality, the supply side is always in deficit and the liability is always in excess due to Riba (interest), the total combined supply cannot discharge the liability.

After going through the above real example, I believe, now we are close to find out why Riba was declared Haram in Quran and Sunnah.

Let us begin with the economic reasoning of WHY?:

The availability of each produce is limited, the liability cannot exceed the availability limit.

In any transaction, if a liability of produce "in excess" of "the produce available" is created, that extra liability would be artificial because excess quantity of produce does not exist.

This universal economic code applies to each and every type of produce; to further get in to the explanation of the rule, let us now identify what represents "the produce", "the transaction", and "extra liability":

The Produce

In its general expression "the produce" is any thing available to human beings for their use or consumption, but here specifically those produce that can be involved in a transaction, it is best to take historical standards of transactions which are based on produce like gold, silver, grains, currency etc. because throughout history all transactions are carried out in publicly acceptable produce only. These produce have served the societies as "medium of exchange", so it is more appropriate logically and historically to consider the produce as "the medium of exchange" which is again a general expression and can accommodate any other commodity/produce that may be used in a transaction.

The Transaction

In this universal economic principle, the transaction is based on a single produce and naturally it can only be a transaction of loan or exchange and nothing else. Although donations/grants also involve only one produce but that is not a transaction because a transaction means exchange of good(s) and/or service(s) either on spot or in any specified time frame involving one or more types of produce.

Extra Liability

Riba (interest, usury) is that extra liability created in excess of the produce available and that does not exist. Every liability is a demand in practice, the basic rule of economics known to every one is that to maintain economic equilibrium (stability) in the society, the supply side should be equal to the demand, if the demand is more than the supply - a shortage will occur. Creating an extra liability means creating an extra demand without increasing equal supply, this will start a never ending mechanism of perpetually increasing the shortage of that produce in the society.

Conclusion:

Riba was prohibited just to prevent the creation of "extra liability/demand" because that is fake and "does not exist" physically, this artificial "extra liability/demand" creates scarcity of the produce in the society and unjustly accumulation of the produce in few hands. Riba (interest, usury) is a mechanism and dangerous weapon that has a power to get hold of assets/properties of individuals, enterprises, and nations deceitfully. This is unfair and against the nature, so ALLAH (SWT) banned Riba (interest, usury) very strictly to stop this criminal action.

Nature is the Limit in Islam; any thing not natural is prohibited, stopped, and declared illegal. The above economic reasons are the only base for the prohibition of Riba, ALLAH (SWT) has allowed everything that is natural but given its strict judgment to stop any behavior, agreement, and practice that is not natural.

Watch the Lecture by Dr. Zakir Naik on the Topic "Interest Free Economy"